Belarus looks towards life after sanctions

As tensions ease in its relationships with the EU and the US, Belarus is confident that it can leave recession behind now that sanctions against the country are being relaxed. Courtney Fingar reports

Suffering under sanctions imposed by both the EU and US, and hit by the knock-on effects of similar action against neighbouring Russia, Belarus has been through some dark economic times in recent years. The small post-Soviet republic tipped into recession in 2015 and the value of its currency plunged to dangerous depths.

Although the economy still has sizeable challenges, there are slivers of light shining through the cracks.

In February 2016, the EU announced it would not renew sanctions against 170 individuals and three large Belarusian companies. While still expressing concerns over the government’s human rights record, Brussels lauded progress that warranted a reward of more constructive engagement. The US has suspended many of its sanctions targeting certain Belarusians on its list of Specially Designated Nationals and Blocked Persons list.

This presents an opportunity for Belarusian officials to better pursue the economic diversification plans they have long espoused and open up much-needed trade and investment links. Over-reliance on Russia – Belarus’s giant ally and primary economic partner – has proved unsustainable. Furthermore, FDI is seen as an urgent priority as a means of providing jobs and growth and helping offset any ill effects of a painful but overdue restructuring of state-owned enterprises.

Brighter future

“We believe that [the lifting of sanctions] will bring long-term positive consequences, because the diversification of our economy depends on our co-operation in Europe and in the US. The more Belarus can diversify, the more it can contribute to stability and economic development in Europe,” deputy minister of economy Alexander Zaborovsky told fDi. “Sanctions hurt in the short term. Whole links are cut off immediately, and after the sanctions are lifted the links take time to restore. We are ready to take this time. We understand that it’s impossible to restore the links and the level of co-operation in one day, but we will work hard.”

The EU seems ready to reframe its relationship with Belarus more positively. “The EU is one of Belarus’s largest partners and we are direct neighbours. We need a prosperous, stable neighbour and we deeply believe that the development of small businesses and the private sector in general is essential to this,” Andrea Wiktorin, the EU’s ambassador in Minsk, told the city’s Kastrycnicki Economic Forum in November.

Mr Zaborovsky says European companies are already showing greater interest in doing business with Belarus, and hopes this will only increase once sanctions have been lifted.

Sources of investment are indeed becoming more diverse. Between 2005 and 2010, Russian investment dominated in Belarus, accounting for three times as many announced greenfield projects as second ranked Germany, according to crossborder investment monitor fDi Markets. China supplied only six projects in that period, worth an estimated $340m, compared with 33 projects and $1.7bn from Russia. But since 2011, China has risen to become the number two source country for number of projects (nine, compared with Russia’s 13) and number three for volume of investment ($458m, versus $675m from Russia). Notably, the US has provided nearly as much investment as China since 2011: seven projects worth a total of $426m.

Healthy diversification

Encouragingly, the mix of sectors attracting greenfield investment in Belarus is well diversified. From 2011 to the present, the transportation sector has accounted for one-quarter of projects, followed by the automotive sector (17%), communications (11%), chemicals (10%) and renewable energy (9%). Software and IT services have taken a small slice of the investment pie, with only 2% of projects, but this is an area in which many feel the country could be competitive due to high levels of tech skills.

FDI and economic growth are a virtuous circle, with improvements in one leading to improvements in the other, and vice versa; Belarus needs these increases to happen in tandem. Mr Zaborovsky says 2017 “will be a time of economic growth and recovery in Belarus”, thanks to increases in external demand and private investment.

“The lifting of EU sanctions and the suspended sanctions in the US will contribute to economic growth and then we will see some recovery in the Russian and Ukrainian economies. Since we have strong links with them that will create some external demand,” says Mr Zaborovsky. “The second big factor is private investment as a country, because we are steadily reducing interest rates, and our monetary policy has become more flexible; we have the lowest inflation in years. It’s about 12% this year and 9% next year. They are a good basis to reduce interest rates in the economy and excellent rates for private investment.”

IMF forecast

Belarus's ministry of economy also expects that 20% of the total investment will come from foreign sources, mainly credits from multilateral institutions that should lead to the completion of several major infrastructure projects. Government projections are more optimistic than those of the IMF: Mr Zaborovsky anticipates growth in 2017 “will be above [the] baseline scenario of 1.7%” while the IMF forecasts flat to slightly negative growth. Negotiations are still ongoing over an IMF support programme for Belarus.

“The macroeconomic situation is stabilising, as is the currency. But the economy is still in recession and structural weaknesses remain unresolved,” says Dr Bas Bakker, senior regional resident representative for central and eastern Europe at the IMF. “Growth will need to come from increasing efficiency, not from government inputs.”

The recovery could be reversed, Mr Zaborovsky admits, “if something very unexpected happens such as a slowdown in commodities, or something unpredictable stops it, but we believe that this fragile equilibrium and global economy will help us to take a step out of this recession”.

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